THE PLAIN ENGLISH GUIDE TO PENSIONS & SIPPS ARE YOU IN THE DARK ABOUT PENSIONS? THE 7 ESSENTIALS YOU NEED TO KNOW
CONTENTS ABOUT OAKLANDS CONTENTS 04 I m sure you ll want someone to advise on your investments with as much experience and diligence that you put into your own work. THE 7 PENSIONS ESSENTIALS 06 01: The building phase of your pension fund 06 That s why hundreds of clients before you have found our fully independent and highly personal service worth looking into. 02: Your hidden wealth - tidying up your old 07 08 04: New pensions auto-enrolment rules 09 what they mean for you 05: Company pension, personal pension or 11 06: Squeezing the most from your pensions 13 SIPP which should you choose? should you DIY or GSI? 07: New Pensions Freedoms - your options 15 YOUR NEXT STEPS 17 upon retirement Tel: 0121 355 4455 First published November 2011 8th Edition December 2015 02 Our 5 step advice process ensures the consistency of service whatever your investments: STEP 1: CURRENT SITUATION ANALYSIS 03: The Golden Rule to beat stock market volatility 12A Duke Street, Sutton Coldfield West Midlands, B72 1RJ OUR SERVICE WHAT YOU CAN GAIN FROM READING THIS GUIDE pensions Published by: Oaklands Wealth Management Ltd. PAGE This means fully understanding your current financial situation and your responsibilities and aspirations. STEP 2: RISK PROFILING This means using a leading risk profiling tool, backed by university research to measure how you react to risk and select funds that allow you to sleep at night. STEP 3: FUTURE WEALTH PLANNING This means taking the information from your expenditure planner to project forward your needs at critical stages in your life or for those whom you are responsible for. STEP 4: PORTFOLIO CONSTRUCTION This means using our proven asset allocation and fund filtering process to put together a portfolio that will meet your needs for income or growth at a risk level you can live with. STEP 5: REGULAR REVIEWS This means that you have a review of your investment portfolio at six month intervals. 0121 355 4455 oaklandswealth.com 03
INTRODUCTION WHAT YOU CAN GAIN FROM READING THIS GUIDE You have never been in a better position to ensure your standard of living continues long after you ve finished working, as long as you do the right things with your money. Why is this so? Well, the new pension freedoms that have come into force since April 2015, mean you can take control of your retirement finances in a way that best suits you. And you have the biggest range of funds to invest your pension savings in than ever before, and a wide choice of advice options to help you make the right decisions. It s fair to say though, that most of us have higher expectations than previous generations of our standard of living and it s something we don t want to give up at any stage of our lives. That s why more than ever before, people are realising that the alternatives to a decent lifestyle in retirement are not very palatable. After working for decades you should not have to worry about running out of money, relying on the measly state pension or selling assets just to survive. Even if you have a pension provided by your employer, have you checked the projections upon your retirement date lately? - You may be surprised at the gap between the income it ll provide and what you ll really need to enjoy life. The Big Question is: Do you know what you need to do to plan ahead and what your options are when approaching retirement? That s where this Plain English guide comes in handy. It explains precisely why you really must take matters into your own hands, what the right pension may be for you, and the best ways to arrange everything. 04 Oh, and I ll guarantee one thing it will make you think about exactly how long you need to work to fund your retirement. Yes, that day you no longer need to work. In fact the starting point for all this is when your retirement date should be. First, you need to pay attention to a very serious statistic. Annuity rates in April 2015 sunk to their lowest level since 2012 So you ll need to gen up about the option of flexible drawdown instead offered by the new pensions freedoms, to see if that works better for you. And with so many people failing to properly plan for the future, they have been forced to keep working way beyond a point they would wish to. While many in the pensions world like to make things very complicated, my aim is to cut through all of this and give you the critical things you need to think about, in a way that s really easy to follow. If you like what you see and want to know more, do call it is even simpler when I can talk through your options personally. Please promise me one thing though, that whether or not you call me, you will do something to ensure your pension is within your control and not left to chance. Your future happiness depends upon it. It s as stark and as simple as that. Best Wishes A recent survey by AXA revealed some very sobering statistics: The average age people are able to afford to retire is 71 years old The average age people think they will be able to retire at is 64 years old Helen Blackburn BA(Hons) DipFA The average age people would like to retire at is 58 years old Managing Director, Oaklands Wealth Management Ltd. There is clearly a huge gap between people s expectations and the reality; 13 years, to be precise. ISO 22222 Certified So if you think that, like previous generations, you can leave your pension arrangements to the state or your employer and you ll be fine at 65, then think again This guide will give you the knowledge you need to prepare for your future, however far you are along your working life. One thing always applies, even if you had shelved sorting out your pension because of other commitments - it is never too late to take control. In fact I ve identified 7 essentials you need to know about pensions. 0121 355 4455 oaklandswealth.com 05
THE 7 PENSIONS ESSENTIALS 01: THE BUILDING PHASE OF YOUR PENSION FUND You don t need me to remind you that the recent pensions revolution won t matter a jot if you don t put your savings away in the first place. It is the biggest investment you can make for yourself and absolutely essential unless you are going to work until you drop. And as you will need to see your pension savings grow to outpace the cost of living you ll need to adopt some sound investment principles to ensure they are structured and managed in a way that offers opportunity for growth while at a risk level you can live with. One thing s for sure you will need some exposure to stock markets to maximise your potential for longer term growth of your savings as part of a diversified portfolio of funds. My guide to Intelligent Investment Strategy gives you 5 principles that all wealth investors follow, whether they invest in ISAs, bonds, collective investments or pensions. Download from our website www.oaklandswealth.com or call us on 0121 355 4455 for us to send your copy. MAKING THE MOST OF YOUR PENSION ALLOWANCES The current lifetime allowance (2015/16 tax year) is 1.25 million, i.e. the maximum you can accumulate in a personal pension. The yearly limit for contributions is 40,000. With basic rate tax relief this means a 32,000 contribution will be grossed up to the 40,000 limit. If you run a company and make contributions that way, you ll not get the tax relief added, though you will be able to count it as a deductible business expense thus saving yourself some corporation tax. And if you have pensions from previous employment you may be able to consolidate these into one simple pot to kick-start your plan. Salary exchange, where you redirect some of your salary into your pension is also a great way of using the savings on National Insurance contributions from yourself and your employer to bolster your pension. TAX BREAKS ON YOUR PENSION CONTRIBUTIONS A word of caution here - tax breaks on pension contributions may not last forever and you d be well advised to make the most of them while they are still on offer - see the inset on page 7 to see how valuable they can be to you. GET ANOTHER BOOST WITH TAX RELIEF ON YOUR REGULAR PENSION SAVINGS It s not often you can get something for nothing from the Government but believe it or not, you can get 20% added to your pension contributions. How does this work? Well, you pay income tax on your earnings before any pension contribution. However, the pension provider claims tax back from the government at the basic rate of 20% and grosses up your contribution. In practice this means for every 80 you pay into your pension you end up with 100 in your pension pot. If you pay tax at a higher rate (40%), you can almost certainly claim more tax relief. Depending on how much you earn over the higher rate tax band, any additional tax relief ranges between an extra 1% up to a maximum of 20%. And if you are an additional-rate tax-payer (45% in tax year 2015/16), you may be able to claim added tax relief at your highest rate. Depending on how much you earn over the higher rate tax band, and your level of contribution, your additional rate tax relief would range between a further 1% up to a maximum of 25%. As a higher rate or additional rate tax-payer you may claim the extra tax relief through your tax return. There is also good news for company owners if your company pays pension contributions for you, these are deductible business expenses and will save your company corporation tax. 06 0121 355 4455 oaklandswealth.com 07
THE 7 PENSIONS ESSENTIALS TAKE CONTROL OF YOUR FUTURE Face the reality about your pensions gap and take control. By 2018 all employers have to provide a pension for their workforce by auto-enrolling them into a company scheme. And you may well have been in a number of company pension schemes so far in your working life. While all this is a positive step forward, it may not add up to the income in retirement that you need to maintain your standard of living. Your pensions gap is quite simply the difference between the amount all your pensions so far will generate in income each year after retirement, and the amount you actually need for your lifestyle and commitments. If you have a Defined Contribution scheme, sometimes called a money purchase scheme, it will depend on the size of your pension pot and what that will buy you in terms of a guaranteed retirement income. Furthermore, if you are like most people you will have been in more than one pension scheme over your working life you ll need to add up what they ll yield as a yearly amount upon retirement then ask if this will give you the standard of living you are used to. I think you may be rather surprised. Why? Well, 2 main reasons: Decisions taken away from you - Because until now your employers have probably been deciding how much they, and you, have been paying into your pension pot. They have been working on the basis of what they are prepared to contribute, not what you need. 02: YOUR HIDDEN WEALTH - TIDYING UP YOUR OLD PENSIONS This has to be the great missed opportunity of a generation of pension savers. Literally hundreds of millions of pounds of money are wasting away in pensions from old jobs. Why is this? Since many of us have many jobs in a lifetime, some with pensions that went with them, it is easy once we leave these jobs to forget about looking after the fund that has accumulated. If this applies to you, do you know how much these are worth when added up? Even if you are aware of all your pensions you need to ask the question: Who is bothered about my previous pension funds working hard for me? Consider this vital question: Are you leaving it to your employer to determine your future standard of living? Whether you have a pension or not, you need to look back over your previous employment to understand your pensions gap. If you have a pension linked to your salary, the amount you have to live off when you retire will be calculated as a proportion of your final salary, or career average earnings, taking into account the number of years you have been paying into the scheme. Default Funds - Many company pension schemes are invested in a mix of funds that are based on a cautious approach to investing. That s because in a large company scheme it is hard to assess the risk each person would be prepared to take with their pension fund. Moreover, there will be a range of ages, so they tend to put everyone s pension contributions into a default fund that may be more cautiously invested than you may wish. What does this mean for you? If you have more than 10 years of your working life left you could be invested in rather pedestrian funds that are not exactly going to make for a rich retirement. While not all default funds will have this effect, the key is to look under the bonnet to see how they are structured and how this fits with your approach to risk. So, if like me you are the sort of person that likes to make their own decisions, with expert guidance of course, these two factors will rankle with you. In short, if your employer is determining the level of luxury you can enjoy in retirement, it s time for you to take charge. Be honest: do you think your ex-employers and their pension fund managers care two hoots about you now you have moved on? Unless you have final salary schemes, which are usually best left alone, any schemes that have had contributions paid into them will not be managed with your interests at heart. They will most likely be put into a convenient fund whose performance will not be reviewed and managed. Here lies your golden opportunity gather up these little pots of pension money and put them into a single pension for yourself that can be properly invested and looked after, in funds that reflect your own circumstances, not someone else s. While individually they are not going to be of great value, anyone with a number of these clearly has much to gain from linking them together in a consolidated single pension. Do be careful however as some pensions may incur penalties to transfer, and these need investigating to see their effect. You need to ask the question: Who is bothered about my previous pension funds working hard for me? 06 0121 355 4455 oaklandswealth.com 07
THE 7 PENSIONS ESSENTIALS 03: THE GOLDEN RULE TO BEAT STOCKMARKET VOLATILITY Remember the old saying look after the pennies and the pounds will look after themselves? The stock markets have been going through a very turbulent ride over the last decade and this has put many people off investing in a pension because they fear that what they put in may be worth less in the future. This is understandable, but misguided, as it is the long term compounding effect of any form of savings, including pensions, that is the key to building a sizeable fund. Yes, you say, I get that, but what about when the market goes down? This is when using a strategy of pound cost averaging is so critical. Pound cost averaging is simply a fancy term for putting away a regular savings amount, for instance a monthly contribution into a pension, to take advantage of fluctuations in the value of the stocks or shares that make up the funds you are invested in. This simple approach takes the worry out of investment decision making. You do not need to panic when the price falls because you will merely be buying more units of your chosen investment at a lower price. And because you are investing funds on a regular basis you need not worry about investing all your savings at the top of the market either. One of the biggest dilemmas investors face is market timing. Jumping in and out of markets on a regular basis not only requires constant monitoring of daily events but also requires the skill to act on such events. Even the best fund managers, such as Richard Buxton and Neil Woodford avoid trying to catch the top or bottom of a market. So in uncertain markets pound cost averaging allows you to build up an investment poised to benefit from a recovery without having to worry about trying to work out when the bottom of the market will occur. 04: NEW PENSIONS AUTO-ENROLMENT RULES WHAT THEY MEAN FOR YOU By 2018 all eligible employees have to be automatically enrolled into a suitable pension scheme under recent government regulations. The date at which your employer is compelled to do so depends on their size. This is good news and a useful piece of legislation that will help people out. Auto-enrolment rules state the minimum contributions your employer and you put into your pension. It is vitally important that you do treat this as a minimum. You should quickly work out what this pot could grow to over the years towards your estimated date of retirement. I think you may be shocked. HOW MUCH DO YOU NEED TO LIVE ON IN RETIREMENT? Retirement isn t what it used to be thankfully. Far more of us will be fit and active late into life and want to combine more of what we d like to do with some part time projects. Along with this often comes the expectation of much higher standards of living than previous generations had. They were lucky if they had a company pension scheme and many relied on the state retirement pension for their sole income. The new flat rate state pension due from April 2016 for those 66 and over, will be around 148 per week (precise figures to be finalised in Autumn 2015). Now I don t know about your lifestyle but I m assuming that this would barely cover your Council Tax and fuel bills? Prudential have run an annual study for the last 8 years on those over 45 and retiring in the year of the study, the findings of which are always interesting. One statistic from the Class of 2015 is the average expected retirement income from those retiring this year has hit 17,000. After tax that equates to 1,310 per month, assuming no other income. How does that amount sound to you - could you live comfortably off that? Averages are fairly meaningless. You aren t average and it s for you to decide what you can afford to live off in retirement and the lifestyle you d like. And a lot will depend on when you intend to finish working. It is quite probable that someone taking the opportunity to retire at 55 will have as many years in retirement as they have been working. 08 0121 355 4455 oaklandswealth.com 09
THE 7 PENSIONS ESSENTIALS LIFE EXPECTANCY AFTER RETIREMENT Average life expectancy now at 81 years of age*, and some academics feel this figure is understated due to the ways in which such data is analysed. The number of people living to 100 rises with each generation See Fig 1. A significant government study in 2011** concluded that a third of babies born in 2013 were expected to live to 100. Fig 1 shows the chances of living to 100 depending on age. Year of birth 1991 1961 1931 19.2% 10.5% 22.8% 26.4% 13.3% 16.2% 2.5% 3.8% 5.1% Male Female Unweighted average All of this data means that you need to be very sure that you have enough of a pension fund to draw from, or to buy a fixed income annuity from, that will give you the income you need for many decades to come. *Office for National Statistics Period and Cohort Life Tables **Department of Work and Pensions Differences in life expectancy between those aged 20, 50 and 80 in 2011. July 2011 05: COMPANY PENSION, PERSONAL PENSION OR SIPP WHICH SHOULD YOU CHOOSE? COMPANY PENSION All companies have a duty to pay into a pension scheme for most of their workforce under the auto-enrolment regulations. However, you need to do your own analysis on the amount that is likely to provide you in retirement and top that up with additional pension contributions. There s another tactic you can use to maximise the contributions you pay into a company pension, called salary exchange: Salary exchange making your money work harder, Salary Exchange is a clever device (and a legal one too) which gives you a bigger pot of money to live off when you retire. With only a simple little form to sign, it increases your pension payment and doesn t cost either you or your employer a bean. Sounds too good to be true? Well, it does take a few minutes to explain and some maths to get your head Fig 2: Salary Exchange Example around but the result is magic. If you reduce your gross salary by the amount that is going to be paid into your pension, it means that you pay no income tax or National Insurance on this reduced bit. At the same time, because the salary is reduced, so the National Insurance is reduced for your employer. So, these National Insurance and income tax savings are added to your pension payments - and if you have a nice employer, they can choose not to keep these savings, and they are paid into your pension. It makes a big difference, it s free - and it s not very often you get a freebie these days. To give you an idea, look at Fig 2 which shows a before and after example. This is for someone earning 70,000 per year paying 5% of their salary into their pension with their employer doing the same: So in this example, if this is you, you would invest 233.33 per month and under salary exchange 635.03 per month is actually invested into your pension plan. Additional benefit from salary exchange: 51.69 every month. I d make the most of this while you can, as the Government is currently reviewing salary exchange and it may not be available in future. Monthly Payments Without Salary Exchange With Salary Exchange Employee Pays 233.33 233.33 Employee Tax Relief 58.34 58.34 Employer Pays 291.67 291.67 National Insurance Rebate N/A 51.69 Amount invested every month 583.34 635.03 ADDITIONAL 51.69 PER MONTH 10 0121 355 4455 oaklandswealth.com 11
THE 7 PENSIONS ESSENTIALS PERSONAL PENSION This pension invests your contribution and your tax relief and buys units into one or a number of funds that you can match to your attitude to risk. What is your attitude to risk? Most people accept the universal truth of nothing ventured, nothing gained but this is a simplistic view of risk. You really need to figure out where you sit between regret over losses incurred from taking too much risk versus regret over potential gains missed through not taking enough risk. So, before you start investing your hard earned cash you need to be sure of your attitude to risk and where your investment comfort zone is. There are some very good risk profiling tools backed by academic research that can help you with this. SELF INVESTED PERSONAL PENSION - SIPP This type of pension not only invests into funds that can be tuned to your attitude to risk but you can also buy into stocks and shares directly and even commercial property. Generally speaking, the number of funds available through a SIPP is vast compared to those available through a personal pension. So it is even more important to understand your investment comfort zone. If, for example, you are a consultant or a business owner a SIPP is often a good option - as your income may fluctuate and you can adjust your contributions to mirror your business income. If your employer is going to pay into a pension for you, it could be either a personal pension or a SIPP. 12 06: SQUEEZING THE MOST FROM YOUR PENSIONS SHOULD YOU DIY OR GSI? Why you should think about value as well as cost You must have read countless press articles expressing the outrage of financial commentators on the charges levied on pensions, and how they rob the individual of a sizeable chunk of their pension fund. Yes, charges are something to consider, and you are right to be concerned. Ill-conceived schemes or poor advisers can do serious damage to your pension fund. In this as in most things in life, you generally get what you pay for. Yet none of us wants to pay more than we need. Therefore it is utterly crucial that you know just how much service and expertise you need - and can be sure you will get it. If you think you need an adviser you need to know how much trouble will they take. What lengths will they go to in order to research the market and construct the right portfolio for your risk profile? How often will they review its performance, assess if your circumstances or thinking have altered and make changes for you accordingly? But, even before that, you need to determine how you are going to arrange and review your pension. The fact is, you don t have to use an adviser. So which is it to be? - Do It Yourself or Get Someone In? Here are your options: Execution only - This is DIY. You pay execution-only brokers to carry out your instructions and arrange a pension without giving you any advice. Restricted advisers - You can be advised by firms that can only recommend certain financial products or providers, or both. Here your options are limited to what they offer: a bit like a shop that only sells a very narrow range of brands or even one that only sells one brand. This may make things somewhat simpler and more profitable - from their point of view, but perhaps not yours. Independent Financial Advisers (IFAs) - offer independent advice and recommend what they think will suit you from the full range of providers and products. How do you decide which option to take? 0121 355 4455 oaklandswealth.com 13
THE 7 PENSIONS ESSENTIALS ASK YOURSELF THE FOLLOWING 3 QUESTIONS: 1 2 3 Am I an astute investor, able to analyse and select the most suitable funds that reflect the level of risk I am comfortable with, from the thousands available? Can I work out my own pensions gap? Am I confident about managing all the money I already have in pension funds from my existing and previous employment? I know nothing about cars though nowadays they pretty much look after themselves for long periods. I do know a lot about pensions, and everything to do with them has been changing rapidly besides which the investment market has been, to say the least, volatile in recent years. They need careful tending, whether by you or someone else. If you feel your situation needs a-la-carte service with regular and informed reviews from someone who isn t tied to a few products that restrict your choice, but aims to get long- term results, well that is our role as an IFA. We analyse your situation and forecast your future requirements with you. Then we construct an individual investment portfolio for you bearing in mind your investment comfort zone and review it regularly. 07: NEW PENSIONS FREEDOMS - YOUR OPTIONS UPON RETIREMENT The pensions freedoms that have been available since April 2015 give you so much more flexibility upon retirement, and your pension savings no longer have to be tied up, or decisions made on how to take income until you are ready. In summary, as you can see from Fig. 3, there are pros and cons to picking either an annuity or drawdown, or a mix of both. What you decide will depend on your individual circumstances and also the level of control you require, balanced against the level of uncertainty you are prepared to take. For those who want to know exactly where they stand, then annuity is an option worth considering. However, if you choose to buy an annuity straight away there really is no turning back and you ll need to assess whether the fixed income you get will be sufficient for your needs over the longer term, taking into account the effect that inflation may have on your spending power. If you continue to work while drawing a pension in the early stages of retirement then you have chance to make your investments go further. If this is not an option for you then you need to think through the likely length of your retirement and what percentage of income you could afford that may be replaced by a growth in your remaining drawdown account. 4 Do I know how much this needs to grow? If you choose flexible drawdown you ll be able to buy an annuity at a later stage if you wish, though the rates you will get are likely to vary depending on market conditions at the time. 5 Have I the time and understanding to review my pension funds regularly, make changes, and know why, how and when I should make such changes? Drawdown does give you the option of managing your own investments, vary your income and take advantage of stock market rises. Of course there is more downside risk if your investments do not perform so well. If the answer to every one of these questions is yes you could organise your own pension through an execution only arrangement. The key really is to ask yourself if you can really make this decision without professional help? Unless you are a highly experienced investor it may pay to seek professional advice on what may suit you best. There are some large supermarket style companies that allow you to self-select your pension and arrange your own transfers. This obviously saves you money. However, you need to consider: What kind of person are you, and how knowledgeable are you about finance and investing? For more information on your retirement options consult our Pensions Freedoms guide, available to download from www.oaklandswealth.com or call us for your copy on 0121 355 4455. The analogy is a bit like running a car. Do you have someone else service it regularly? Or do you know enough about car maintenance and have the time and inclination to do it yourself? 14 0121 355 4455 oaklandswealth.com 15
THE 7 PENSIONS ESSENTIALS YOUR NEXT STEPS... Make a start and don t put it off. Resolve to get this quickly in your out-tray in a way that gives you peace of mind. 1. Decide if you want to sort all this out for yourself or get help from an expert financial planner. Be realistic - do you have the time and expertise to pick funds and review your investments impartially? 2. Get together all your old pensions statements and contact details of the pensions administrators for each organisation you have worked for. FIG 3. PROS AND CONS OF DRAWDOWN AND ANNUITIES AT A GLANCE ANNUITIES 16 PROS & CONS DRAWDOWN A guaranteed regular monthly income is paid into your bank account. This cannot be reversed. CONTROL You choose investments in your own income drawdown account and you can opt to take an annuity at any time. Secure income agreed at outset it will never run out for your lifetime or agreed fixed term. SECURITY Income is not secure. It has the potential for growth and reduction. Cannot usually change the income agreed at the outset. FLEXIBILITY You can vary your income to suit changing needs and investment performance. You could run out of money if you don t manage your account properly. Fixed income may not keep up with inflation. You cannot invest in other ways once the annuity has been agreed, or take advantage of better annuity rates. RISK Death benefits have to be fixed at the outset. BENEFICIARIES It is more complex and you may need advice to help you manage your investments. You can change death benefits for anyone at any time. 3. Work out what you have in your various pension pots so far, forecast what you shall need to live off at your chosen retirement date and identify the gap you need to fill. 4. Assess your appetite for risk, and structure your pension accordingly. 5. Make a plan and implement it, and have it reviewed at least yearly, preferably every six months. Or you could just call my team on 0121 355 4455 and we can take all of this off your hands and sort it out for you. Best Wishes Helen Blackburn BA(Hons) DipFA ISO 22222 Certified Managing Director, Oaklands Wealth Management Ltd. 0121 355 4455 oaklandswealth.com 17
Oaklands Wealth Management Ltd is Authorised and Regulated by the Financial Conduct Authority. FCA No. 432451 Company Registration No. 05073585 VAT Registration No. 974501021 DISCLAIMER: Please note that no statement within this guide should be construed as giving investment advice within or outside the UK. Information contained herein is intended as general guidance only and you should seek the advice of an Independent Financial Adviser, accountant, or tax adviser on your own particular personal circumstances. The author and Oaklands Wealth Management Ltd cannot accept any responsibility or liability for loss which may arise from reliance on such information contained within this guide. Any references to taxation are based on our understanding of current legislation and HM Revenue and Customs practice, which can change.